SAN FRANCISCO — As the U.S. Department of Justice tries to thwart the $11 billion merger of U.S. Airways and American Airlines, the Antitrust Division's unusual fight to unravel the tie-up of two little-known social commerce companies is turning heads in Silicon Valley.
A bench trial is set for Sept. 23 before U.S. District Judge William Orrick in San Francisco to resolve the fate of Bazaarvoice's 2012 acquisition of its main competitor, PowerReviews, which the government claims snuffed out competition in the market for online product reviews and ratings.
The $168 million deal was too small to require reporting under the Hart-Scott-Rodino Act, making government intervention less likely. By the time the DOJ filed its case challenging the merger this January, the deal was already consummated, raising the stakes for the upcoming trial.
The case has been a wake-up call for Silicon Valley and its emerging companies, where executives may assume their deals are too small to prompt scrutiny from antitrust regulators.
"A lot of companies that have not gone through a merger review are surprised and dismayed that a case involving two small parties and a deal that has been closed is even being litigated," said Chris Compton, a longtime antitrust lawyer in the Valley who is not involved in the case.
Merger trials like U.S. v. Bazaarvoice, 13-133, are exceedingly rare — parties usually make concessions to strike a deal that both regulators and company executives can be at peace with, antitrust lawyers say. But Bazaarvoice is digging in its heels. Represented by Wilson Sonsini Goodrich & Rosati, the Austin-based company has committed vast resources to defend the deal in court and hold onto a company that generated less than $12 million in annual revenue before it was acquired.
And the DOJ — fielding a team led by Peter Huston, assistant chief of the Antitrust Division in San Francisco — does not seem willing to compromise either. The agency is asking Judge Orrick to compel Bazaarvoice to divest enough assets to create a company that can replace PowerReviews.
Both companies sold software tools that collect and display product ratings and reviews from consumers. Bazaarvoice lists Best Buy, CarMax, and Dell among dozens of clients on its website. According to the Justice Department, the absorption of its primary rival leaves Bazaarvoice without meaningful competition and leaves customers without choices.
The DOJ rarely targets deals that fall below the threshold for reporting — the Bazaarvoice/PowerReviews acquisition was one of just two such mergers spurring litigation by regulators in the past fiscal year. But when the agency does step in, it can be disastrous for the companies involved. The reporting process is something of a safeguard for companies, alerting them to regulators' concerns before closing. Once deals have gone through, corporate executives may feel it's too late to turn back.
"Maybe you've laid people off or changed your product road map," said Compton, who recently retired from Wilson Sonsini and founded the Compton Antitrust Law Office. "It's very tough to unscramble that egg, and as a consequence the parties almost have to litigate. There's really no good alternative once they've closed."
Most of the government's ammunition against Bazaarvoice comes straight from its executives. According to the complaint, one of Bazaarvoice's co-founders said the acquisition of PowerReviews would give Bazaarvoice "relief from price erosion." Bazaarvoice's current CEO wrote that the company had "literally, no other competitors."
Pointing to those statements, the government argues that the acquisition enabled Bazaarvoice to raise prices above competitive levels and robbed customers, who had once pitted the companies against each other, of bargaining power.
Antitrust investigations often hinge on "bad documents," or internal company statements that indicate that a deal will dampen competition. Bazaarvoice supplied the DOJ with "the classic bad documents," said Craig Waldman, an antitrust partner at Jones Day in San Francisco. As regulators are usually working to stop deals before they go through, they point to such documents to predict a merger's likely impact on the market, Waldman said.
But Bazaarvoice's lawyers argue that such predictions are irrelevant because the deal has already been completed. The Wilson Sonsini team led by partner Boris Feldman counters that despite executives' expectations, Bazaarvoice continues to face competition. Wilson Sonsini represented the company in the acquisition and in its IPO.
"The reality is that there has been substantial competitor repositioning and entry, and intense competition on price and innovation," Feldman argued in Bazaarvoice's answer to the complaint.
The case will be an interesting one for antitrust lawyers to watch, perhaps indicating how they should weigh different forms of evidence in their own cases.
"It boils down to a really fascinating battle between bad documents and market realities," Waldman said.
Waldman noted that market definitions are often nebulous in the technology sector, particularly in emerging sectors.
The government does not quantify the level of Bazaarvoice's market domination in its complaint. But it insists that Bazaarvoice is now an untouchable juggernaut in the field of online product reviews and ratings. Bazaarvoice says the government defines the market far too narrowly. Platforms for product reviews and ratings can be built by companies in house, and retailers can engage with customers in many other ways, the company claims.
"There is no single market for 'product ratings and reviews,'" the company said in a statement issued in January in response to the suit. "Other prominent tools include Facebook, Twitter, question and answer and community forums."
Plus, the company insists, there is greater competition among software firms like Bazaarvoice than the government acknowledges. The government seeks to limit the market to the United States, which Bazaarvoice says would rule out some of its key rivals. Shortly after the merger, British competitor Reevoo opened an office in the U.S., according to a joint case management statement. "In this dynamic industry that is still in its infancy, the evidence will show that competition continues to flourish," Bazaarvoice contends in court filings.
Although trials are few and far between, the government scrutinizes small deals more often than executives might like to think, antitrust lawyers say.
M&A lawyers have sensed greater attention to small deals since the Obama administration vowed to take a hard look at technology transactions of any size, Cooley M&A partner Jamie Leigh said. She added that the recession may have left regulators with fewer large deals to review.
Antitrust issues generally receive less attention from lawyers on smaller deals, said Cooley corporate partner Eric Jensen. But cases like Bazaarvoice confirm that the size of a deal isn't a definitive guide to whether regulators will take notice, he said.
"As a corporate lawyer, bright lines are great — this is in and this is out," Jensen said. "But antitrust is clearly not one of those areas."
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